When Health Affairs published its article on the “most profitable” acute care hospitals, it created quite a stir (see Non-Profit Hospitals Dominate Top 10 Most Profitable Ranking In 2013). The focus of the discussion? The “top ten” list was dominated (seven of ten) by non-profit facilities. I thought most of the discussion that followed this article missed the point. The issue of “non-profit profitability” is an important one – with what I see as three key issues:
- There is a difference between “non-profit” and “tax-exempt”
- Non-profits do need to make profits
- Tax-exempt non-profits will increasingly need to document their “community benefit”
There is a difference between “non-profit” and “tax-exempt” – Although these terms are often used interchangeably, they are not. I asked the experts on our team to clarify. “A non-profit is an organizational status, usually defined by the state where they are incorporated, reserved for organizations that have a purpose of serving the public good, and not to create a profit,” said OPEN MINDS senior associate Ken Carr.” They are nonprofit because of their public purpose, and because they do not distribute profits to shareholders. They can still generate a profit, but it must be reinvested in the organization to serve their mission. With regard to tax-exempt status, a tax-exempt organization meets requirements of the IRS or state laws that may exempt them from income, property and other forms of taxes.”
James Stewart, chief executive officer of Grafton and OPEN MINDS advisory board member, expanded on this, “Non-profit status generally refers to an ‘income tax’ status at the federal level, which most often grants the same status at the ‘state income tax’ level. However, tax exempt status often varies by state. At the state level, most language revolves around charity status which can lead to exemption of property and excise taxes depending on state. In some states, like Virginia, that status can be different county-by-county based on that particular counties determination.”
Non-profits do need to make “profits” – Successful organizations need to bring in more revenue than expenses, including organizations that are designated as non-profit. In a for-profit organization, a key use of profits is to repay investors who, as shareholders, have put up the capital needed to create and operate the organizations – as well as having capital to invest in future service lines and other strategic initiatives. Non-profit organizations may not have investors to repay, but they have the same capital needs for strategic initiatives. In fact, one of the key challenges for non-profit executive teams is coming up with the capital needed to finance collaborations and new service line developments (see Need Financing For Your Next Big Service? and The Financing Challenge For Providers With Increasing Managed Care & Value-Based Contracting).