Question

The board of directors of your for-profit hospital has been approached by a nonprofit hospital to consider a joint venture to take over their business resulting in a larger for-profit medical center status. You have been asked to construct a financial risk analysis for this conversion. Using course materials, including your text and the Internet, and principles of financial risk analysis, evaluate the considerations that a nonprofit hospital has in considering the conversion to a for-profit hospital.

Consider the following topics in your discussion:

Key characteristics of nonprofit hospitals that differ from for-profit hospitals

Include the characteristics required to maintain a nonprofit status.

The need for shifts in corporate structure required for survival in this environment, including safety net requirements and responsibilities

Potential reasons driving both organizations and considerations between an outright merger verses a corporate alliance or joint venture.

Assessment of the payer mix, financial benchmarks of nonprofit and for-profit hospitals

Consider uncompensated care burdens within the for-profit model

Proffer a decision based on your analysis of whether the organization should convert, create a joint venture, or decline the offer with rationale and justification.  

Your paper must include your financial information derived in your risk analysis as an appendix included after the Reference page.

Answer 1

The main theme of a nonprofit hospital is to meet the medical needs of the neighboring community and most of these hospitals are mission driven and tend to have operated for several years. Some religious organizations are mostly supporting these facilities and operate on the directed religious values (Bales, Tiberio, & Tesch). The healthcare industry players are under increasing pressure to compete in the marketplace, enter into partnerships with other providers or offer quality medical care. This pressure causes the nonprofit hospitals to explore the available options to stay viable and solvent. Some of the options include conversion to the for-profit hospital or getting into mergers or joint ventures with the for-profit facilities. This paper makes an analysis of a proposed joint venture between such two hospitals to determine if the organization should convert or create the joint venture.

Characteristics required of nonprofit hospitals that differ from for-profit hospitals

The main feature that differentiates the nonprofit and for-profit hospitals is that nonprofit facilities operate to achieve a charitable purpose and have no stockholder ownership (Herbert, 2012). These organizations are exempt from being taxed policies since they do not make any taxable profits. Their primary source of finances is contributions from people with no expectation of any monetary returns. Most of these also depend on charitable contributions from the state and federal governments and a variety of other sources to have the necessary funds to meet their expenses.

The Internal Revenue Service is the body mandated to pass income tax exemptions of the nonprofit hospitals. The exemption in made when the facility proves that it will exclusively operate for welfare, educational or charitable purposes. The donors who fund the hospital also receive tax deductions for because of the charitable contributions they make and those who own business enjoy the privilege of acquiring debt financing at lower tax-exempt rates. Therefore, the nonprofit organizations solely aim at engaging in medical activities that further the public purposes but not private interests.

The nonprofit organizations also have the characteristic of nondistribution constraint. This limitation prevents such associations from distributing any or part of the facility’s assets, incomes and profits to its members, workers or managers (Render & Haksever, 2013). The reason for this constraint is to prevent any individual from benefiting from the funds donated to the organization.

Another important characteristic of the nonprofit hospitals is their reliance on volunteers. Since these organizations do not make profits, most of them lack adequate funds to employ the different kinds of workers required. Therefore, they rely on individuals who contribute their time and labor to ensure continuity of the hospital activities.

Need for shifts in corporate structure

The for-profit has a structure that includes stockholders who elect a board of directors who hold the responsibility of running the operations of the facility (Harrison & Harrison, 2012). The board is accountable to the shareholders. The board then appoints the top management personnel who oversee the day to day activities. These organizations design their structures in a way that promotes the maximization of profits.

The nonprofit hospitals have a board that mostly made up of committed leaders who dedicate themselves to see the achievement of the charitable mission of the organization. However, the board has no shareholders to whom they are accountable. If the nonprofit hospital converts to be for-profit, it will require making several adjustments to its structure like acquiring new investors or shareholders. Other changes will involve setting structures that will aim at increasing the profits earned by the institution since it will require the profits to meet its expenses that include salaries for its workers.

Outright mergers versus corporate alliance or joint venture

The earliest mergers experienced in the health care sector involved for-profit hospitals (Sanbar, 2007). However, more recently there have arisen challenging mergers between nonprofit and for-profit hospitals. The occurrence of this merger will lead to several changes in the vertical and horizontal structures of the two hospitals. The management must first identify the reason for undertaking this merger. Mergers sometimes occur to create a monopoly power in a certain geographical area. The two hospitals may collude so as to charge monopoly prices. Such monopolies also attain economies of scale.

Mergers also take place for the merged hospitals to improve the quality of care they give (Greenberg, 2012). Evidence have shown that perform a higher number of surgeries or serve a large number of patients may achieve offering improved quality of care after merging.

Other forms of mergers or conversions include complete or partial conversions. In the extreme cases, the nonprofit hospital converts the entire facility changes it legal form from nonprofit to for-profit or is completely by a for-profit hospital. The apparent change of the organizational form during a merger is complicated since the assets of the nonprofit facility do not belong to any particular individuals. In a case where the institution may require selling some of its assets, or receives money from the for-profit organization, it is not clear to who receives such proceeds.

Joint ventures between nonprofit and for-profit hospitals are also common (Steuerle & Boris, 2006). In a joint venture, the for-profit hospital and one or more nonprofit hospitals join to become a for-profit institution jointly owned by the two facilities. Control is the key in such arrangements. If the hospital were to engage in a joint venture, it would have to share the profits earned with the nonprofit organization.

Assessment of payments and finances

Payer mix refers to the percentage of revenues that a hospital receives from the patients who seek their services of insurance institutions. The reimbursement patterns to be used after the merger depends on the payer mix of the patient base of these two hospitals.

Since the for-profit hospitals, the primary aim is to engage in profitable services; they tend only to offer profitable services and shy away from the low paying services. These hospitals also tend to locate facilities in particular areas where they can get a good mix. The payer mix is one of the control variables that are important in this analysis since it will have an impact on the efficiency of the hospital if the merger is undertaken. For instance, Medicaid reimbursements payments are lower than Medicare and private payers. Therefore, a hospital that relies on Medicaid will have a shortage of revenues. The hospital should only engage in a merger in only the merger will maximize profits.

The nonprofit hospitals have poor payer mix than the for-profit ones especially those handling a large number of uninsured patients (Feldman, 2009). This combination causes the facilities to be under financial strain with many of them struggling to keep in operation. This strains their ability to offer quality prices and is the primary cause of considering merging with the for-profit hospitals.

The for-profit hospitals are completely in charge of the amount of revenue they collect. They charge their services in a way that ensure that they earn the expected profits. In case, the benefits reduce, the hospital can identify the areas that have led to the decline and take corrective action. The control over the source of finances gives the for-profit hospital an edge over the nonprofit facilities. This advantage has seen many nonprofit hospitals consider merging or converting into for-profit institutions. Evidence has also shown that the for-profit hospitals financially perform better than the charitable ones.

Decision from the analysis

From the above discussion, one can infer that the hospital operating as a for-profit institution has an excellent operating and financial base than the nonprofit hospital. A merger would increase the capacity of the hospital, increase the customer base and improve the profits earned. The shareholders value of investments and expected returns would also increase. Having a joint venture would mean that the hospital would not have total control of the hospital. Therefore, I recommend that the hospital should convert the nonprofit hospital to the for-profit hospital.

References:

Bales, R., Tiberio, K., & Tesch, T. (n.d.). nonprofit or for profit? Hospital conversion considerations. The Camden Group, 2-23.

Feldman, A. M. (2009). Pursuing Excellence in Healthcare: Preserving America's Academic Medical Centers. Boca Raton: CRC Press.

Greenberg, W. (2012). The Health Care Marketplace. Berlin: Springer Science & Business Media.

Harrison, W. P., & Harrison, C. (2012). Introduction to Health Care Finance and Accounting. Boston: Cengage Learning.